Should there be a limit on compensation for accident victims?

Every time you drive out in your car, you are taking a risk. A small mishap can leave you holding a bill of a few thousand rupees. The bill could be fatter if someone gets hurt or dies. There is no limit to the compensation that can be claimed. In 2002, a court awarded Rs 12 crore to the family of an NRI doctor killed in an accident.

Thankfully, third-party liability insurance is mandatory for all vehicles and offers unlimited cover for injuries and death caused by the vehicle. Third-party insurance rates were hiked in April this year but are still very low. For less than Rs 1,000 a year, the owner of a mid-sized car is fully protected against claims by accident victims.

However, this can change soon. The amended Motor Vehicles Act 1988, which has been passed by the Rajya Sabha and will be tabled in the Lok Sabha in the monsoon session of Parliament, places a cap on the liability of insurance companies. The insurer will be liable to pay a maximum compensation of Rs 1 lakh in case of injuries or disability, and Rs 10 lakh in case of death. The opposition parties are, however, not in favour of a ceiling for compensation and are pressing for modifications.

Double whammy for victims

Placing a cap on the liability of the insurance company is obviously not in the interest of the victim. Considering the high cost of health care, a compensation of Rs 1 lakh for injuries means just enough to pay for 3-4 days of hospitalisation.

The change could have serious ramifications for car owners as well. "It is not clear whether a victim can claim more than the limit set under the proposed law," says Delhi-based lawyer Navneet Goyal. If he is not satisfied with the compensation awarded by the Motor Accident Claims Tribunal (MACT), an accident victim can appeal in a higher court. In April this year, Goyal won an appeal in the Delhi High Court to enhance the compensation awarded to the widow of an accident victim by the MACT (see box ).

How compensation is calculated

A complex formula takes into account the income, age and number of dependants of the victim, as well as the extent of the injuries, to decide on the compensation amount.

Instead of capping the liability, says Goyal, the amendment should give the car owner the option to choose a higher cover. "If Rs 784 a year offers a cover of up to Rs 10 lakh (in case of death), the buyer should be given the option to pay Rs 2,000 a year for a cover of Rs 30 lakh," he says.

That's a fair proposition, which will allow car owners to choose the level of risk they want to take. This principle has worked well in the cover for third-party property damage. One can opt for a basic cover of Rs 6,000 or choose a bigger cover of up to Rs 7.5 lakh by paying extra.

Is your car insured?

The huge compensation paid to victims should be a wake-up call for owners who don't take their vehicle insurance seriously. It is illegal to drive a motor vehicle without third-party cover, and if you forget to renew your car's insurance, you are taking a bigger risk than you can possibly fathom. If the vehicle is involved in a fatal accident, even if someone else was driving it, you will have to pay a compensation from your own pocket. In many cases, even though the victim has been at fault, courts have awarded 40-50% of the claimed amount as compensation.

Ranjit Rai Grover, director of Amity School of Insurance, Banking & Actuarial Science, estimates that at least 5% of the vehicles on the roads do not have valid insurance. If your car figures in this careless bunch, get your insurance renewed before it's too late. Remember, vehicle insurance does not offer any grace period. If you miss the premium deadline, the policy ends and you have to apply afresh. This also means that you lose the no-claim bonus on the lapsed policy.

What to do in case of a mishap

If your car is involved in an accident, the first thing to do is to report the matter to the police. Two cases are filed after an accident. One is a criminal case, which examines the culpability of the driver, while the other is a compensation case filed in the MACT. The outcome of the latter case does not affect the criminal case for negligent driving in any way. Make sure the police report does not twist facts to hurt your interests.

Why the cap on liability

Insurance companies have been lobbying for a cap on the liability for several years. They contend that they are losing money on third-party insurance because the compensation is higher than the premium earned. This is because the premium is fixed by the government according to the engine size. For private vehicles, this can range from Rs 784 (engines up to 1,000 cc) to Rs 2,853 (above 1,500 cc). For two-wheelers, the premium is Rs 350-680 a year, depending on engine size.